Roubini doubtful on depression

Everybody's favorite doomsdayer, Nouriel Roubini, tells Luke Mullins at U.S. News that the more likely scenario is a severe recession that will bottom out in about a year. The big question is how quickly the bottoming out turns into significant expansion.

We could end up like Japan that had essentially economic stagnation for a decade with deflation. You know, the "L"-shaped recession. At this point the "U"-shaped recession could turn into an "L"-shaped recession if we don't fix the financial system, and the credit crisis becomes worse and if we don't get a massive fiscal stimulus. So, a lot depends on our policy reaction. If our policy reaction is appropriate, by 2010 there will be some recovery of growth. The only risk is that the recovery of growth could be so weak that it feels like a recession even though we are technically out of it. So there is a risk of something like a Japanese-style, multiyear economic stagnation. I would not rule it out, but it is not my benchmark scenario. I think there is a one-third probability it will end up that way, but a two-thirds probability that we will end up in a severe, two-year-long recession. And that would be by any standard the worst recession that the U.S. has experienced in the last 60 years.

Even this less-than-wonderful outcome depends on getting a massive fiscal stimulus plan in place. Also needed, says Roubini, is the recapitalization of all financial institutions – not just banks – and the reduction of debt burdens on those insolvent households.